Chapter 3

• two facets of the company's situation:

  • its external environment: industry and competitive environments in which it operates
  • its internal environment: the company's resources and organizational capabilities
• the macro-environment encompasses the broad environment context in which a firm is situated and is comprised of six principal components:

  1. political factors
  2. economic conditions
  3. sociocultural forces
  4. technological factors
  5. environmental factors
  6. legal/regulatory conditions
• PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment:

  political, economic, social, technological, environmental, and legal forces
• state of competition: where are we now?

  • the dynamics of competition are not the same from one industry to another
• the five forces model of competition:

  • it is the most powerful and widely used tool for assessing the strength of the competitive forces that affect an industry's attractiveness.
• competitive pressures:

  • bargaining power of buyers
  • substitute products of firms in other industries
  • bargaining power of suppliers
  • the threat of new entrants into the market
  • rivalry among competing sellers
• Whether seller-buyer relationships represent a minor or significant competitive force in limiting industry profitability depends on:

  • some or many buyers having sufficient bargaining leverage to obtain price concessions and other favorable terms
  • the extent to which buyer are price-sensitive
• buyers gain bargaining leverage when:

  • their costs of switching to competing brands or substitutes are relatively low
  • their large size allows them to demand concessions
  • they are few in number, control market access or, if a buyer-customer is particularly important to a seller
  • weak buyer demand creates a buyers' market
  • buyers are well informed about products, prices, and costs
  • buyers can integrate backward into the business of sellers
• the strength of competitive pressures from the sellers of substitute products depends on whether:

  • substitutes are readily available and attractively priced
  • buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes
  • the costs that buyers incur in switching to the substitutes are high or low
• Industry suppliers can exert substantial bargaining power or leverage if:

  • the supplied item is not a commodity readily available from many suppliers
  • industry members cannot switch their purchases to another supplier or switch to attractive substitutes
  • certain required inputs are in short supply
  • certain suppliers provide a differentiated item that enhances the desired performance, quality, or image of the industry's product.
• Industry suppliers can exert substantial bargaining power or leverage when:

  • they provide specialized equipment or services that yield cost savings to industry members in conducting their operations
  • a large fraction of the costs of the buyer industry's product is accounted by the cost of a particular input
  • industry members are not major or large customers of suppliers
  • it does not make good economic sense for industry members to vertically integrate backward
• the threat of entrants into the marketplace presents significant competitive pressure when:

  • there is a sizeable pool of likely entry candidates
  • potential entrants have ample entry resources at their command
  • current industry participants are looking beyond their current markets for growth opportunities
  • when the industry is growing, offers attractive profit opportunities, and its barriers to entry are low
• what are the barriers to entry?

  • sizable economies of scale in production or other areas of operation
  • cost and resource disadvantages not related to scale of operation
  • strong brand preferences and customer loyalty
  • high capital requirements
  • restrictive regulatory policies
  • difficulties in building a network of distributors-retailers and securing space on retailers' shelves
  • tariffs and international trade restrictions
  • industry incumbents that can launch initiatives to block a successful entry
• when is the competitive force of rivalry most intense among competing sellers?

  • competitors are becoming more equal in size and capability
  • market growth slows or declines and lower demand results in no growth opportunities, excess capacity, and inventory
  • industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume
• when is the competitive force of rivalry most intense among competing sellers?

  • it has become less costly for buyers to switch brands as products of rival sellers have become more standardized
  • high exit barriers block failing competitors from leaving the industry
  • strong outside firms acquire weak firms in the industry and launch aggressive, well-funded moves to build market share
• The rivalry among industry competitors is usually weaker in industries where:

  • the products of industry rivals become more differentiated
  • markets or market segments are expanding and fast-growing
  • markets are comprised of vast numbers of small rivals; likewise, it is often weak when there are fewer than five competitors
• industry rivalry

  • cutthroat (brutal)
  • fierce (strong)
  • moderate (normal)
  • weak
• cutthroat- competitors engage in protracted price wars or employ other aggressive tactics mutually destructive to profitability
• fierce- a vigorous market share battle reduces the profit margins of most industry rivals to bare-bones levels
• moderate- maneuvering among industry rivals, while lively and healthy, still allows most rivals to earn acceptable profits
• weak- industry rivals satisfied with their sales growth and market share rarely undertake offensives against their competitors
• as a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants
• the stronger the forces of competition, the harder it becomes for industry members to earn attractive profits
• the ideal competitive environment for earning superior profits occurs when:

  • suppliers and customers are in weak bargaining positions
  • there are no good substitues
  • high entry barriers deter entry of new competitors
  • internal rivalry produces moderate competitive pressure
• an industry is competitively unattractive when all five forces are producing strong competitive pressures

  • internal rivalry among competitors is strong
  • low entry barriers result in entry of new competitors
  • competition from substitutes is intense
  • suppliers and customers are in strong bargaining positions
• driving forces analysis has three steps:

  1. identifying the present driving forces, as only three to four factors qualify as real drivers of change
  2. assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive
  3. determining what strategy changes are needed to prepare for the impact of the driving forces
• driving forces are the major underlying causes of change in industry and competitive conditions
• some driving forces originate in the outer ring of the company's macro-environment but most originate in the company's more immediate industry and competitive environment
• common driving forces

  • changes in the long-term industry growth rate
  • increasing globalization
  • emerging new internet capabilities and applications
  • changes in who buys the product and how they use it
  • product innovation
• common driving forces

  • technological change and manufacturing process innovation
  • marketing innovation
  • entry or exit of major firms
  • diffusion of technical know-how across more companies and more countries
  • changes in cost and efficiency
• common driving forces

  • growing buyer preferences for differentiated products instead of a standardized commodity product
  • regulatory influences and government policy changes
  • changing societal concerns, attitudes, and lifestyles
• strategic group mapping:

  • it is a useful technique for graphically displaying different market or competitive positions that rival firms occupy in the industry
• a strategic group

  • it is a cluster of industry rivals that have similar competitive approaches and market positions
• strategic group mapping is a technique for displaying the different market or competitive positions that rival firms often occupy in the industry
• a strategic group is a cluster of industry rivals that have similar competitive approaches and market positions
• framework for analysis of rival competitors:

  • current strategy
  • objectives
  • capabilities
  • assumptions
• current strategy- rival's market position, competitive advantage bias, and its investments in infrastructure, technology, or other resources
• objectives- its performance on current financial and strategic objectives
• capabilities- its current set of capabilities and efforts to acquire new capabilities related to future strategic moves
• assumptions- views and beliefs of rival's top managers about their firm's strategic situation can strongly impact their future behaviors